Anti-Amazon

It’s that time of year again. Time for the analysts and pundits to start looking ahead and muse about their favorite investment themes for the coming year in 2018.

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So what’s among my favorite investment themes for 2018? The “Anti-Amazon” trade.

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The prefix “anti” has two meanings among others. It can mean “against.” It can also mean “opposite of.”

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I’m not against Amazon in any way. In fact, as mentioned in previous articles, I love the company.

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I love Amazon the company. The stock does cause me to shudder a bit, however, for any stock that has quadrupled over the course of three calendar years to become the fifth-largest company in the U.S. as measured by market cap despite profitability that remains razor thin and spotty at best certainly raises an eyebrow. Granted, I know the company is sacrificing profitability to gain market share. I also know the company is a prolific cash flow generator and the profit machine can supposedly be turned on at the flip of a switch once the world has been conquered, but the last I checked many of the businesses in which they operate (mass market consumer retail, I guess groceries now too) are razor thin margin businesses in their own right and remain exposed to heavy future competition.

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One of the various absurdities that has defined the investment marketplace narrative over the past few years in general and 2017 in particular is the following notion: once Amazon merely decides to enter a new industry, all other competitors are toast. While such ideas make for grand talking points in the financial media, they are largely unreasonable from a fundamental business standpoint. Sure, Amazon has the competitive girth to enter an industry and dominate. But such dominance is not obtained overnight no matter what the size of the entrant. Instead, this supremacy is gained over extended periods of time that can extend over years if not decades, often with a vicious competitive fight with the existing industry participants the magnitude of which depends on their financial strength.

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A perfect example of this point came this past summer with the announcement by online retailer Amazon that they were acquiring bricks-and-mortar grocer Whole Foods. No sooner did the news hit the headlines then the shares of the grocery store retailers already operating in the space including the likes of Kroger were completely obliterated. The share prices of major food companies such as General Mills also came under fire. The narrative? That the new Amazon Whole Foods was effectively going to immediately run over competing grocery stores across the country and because of its low price strategy would compound the price disinflation/deflation pressures in the food industry.

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Looking at this from a different perspective, is it at all possible that Amazon’s acquisition of Whole Foods, its first major foray into bricks-and-mortar retailing for the online giant, was not a move hell bent on global grocery domination but instead an implicit admission of failure around the notion of successfully selling groceries online including the sale of those particularly challenging perishable fresh items? Or is it possible that Amazon’s purchase of Whole Foods was not a move hell bent on global grocery domination but instead a move more specifically targeted at gaining greater access to the potentially more profit boosting high income consumer in the selected wealthy metropolitan statistical areas where Whole Foods already has an established presence?

If either of these notions are true, it makes me all the more glad I got long Kroger after the June cascade to the downside. And I’m loving Kroger even more on Thursday following the release of their latest quarterly numbers.